Private sector credit growth surged in September, defying expectations and rising at its steepest pace in seven years as consumers battling the cost-of-living crisis tapped their credit cards and drew down their overdrafts, while base effects and energy reforms lifted corporate demand for debt.
Reserve Bank data shows that private sector credit increased 9.7% year on year, topping market expectations of 8.15% and extending the growth in credit demand to the 15th straight month. The most significant contributor was assets-backed credit, accounting for 50.9% of total credit.
Typically, rising credit demand is seen as a sign of a booming economy but coupled with consumer confidence hovering at the worst level in more than 30 years and unprecedented rolling power cuts, the data, according to economists, underscores the cost-of-living squeeze for consumers and a recovery from a low base.
It comes as the Reserve Bank mounts an aggressive war against inflation — which stood at 7.5% in September — with interest rate increases that threaten to erode the spending power of consumers in the economy, where household debt as a percentage of income stands at more than 66%.
“The Reserve Bank is projected to implement a further large interest rate increase in November, potentially 100 basis points, increasing borrowing costs and weighing further on heavily indebted households,” said Lara Hodes, an economist at Investec, which had forecast credit growth would ease to 7.5% in September.
“We expect lending standards to tighten more meaningfully, and household credit growth momentum to slow in the coming months.”
The data showed household debt increased 7.2% from 7.1%.
While there are signs that consumers are feeling the strain of higher borrowing costs and rampant inflation, businesses seem less affected as demand recovers from low levels and sweeping energy reforms unleash new credit demand for investment spending.
Corporate credit rose 13.8%, with all its subcomponents expanding faster than expected. General loans and advances led the way, accelerating 20.2%, reflecting continued improvement in capital investment. Credit cards and overdrafts remained firmly in the double digits, with expansion of 20.5% and 13.1%, respectively. Home loans rose 6%.
Growth in corporate asset-backed credit also increased, mainly lifted by purchases of new vehicles.
Johannes Khosa, an economist at Nedbank, said that even though corporate demand would continue to be lifted by base effects and some improvement in private sector fixed investment, particularly renewable energy projects, companies are generally wary of accelerating capital expenditure.
“This is due to lingering structural constraints, including electricity shortages, slow progress on structural reform and ample spare capacity in some industries, which is weighing negatively on business confidence,” Khosa said.
“So the growth rate in corporate credit will start to slow as the base effect dissipates.”
Khosa said they expected the August growth in total credit to be at about its peak in the current cycle. He said Nedbank expects private sector credit to start moderating in the coming months as base effects dissipate.
“A modest improvement in household finances and some distressed borrowing will still support household credit demand. However, the upside will partly be contained by elevated inflation and rising interest rates, which will erode disposable income, weigh on consumer confidence and cause households to be cautious about taking on more debt,” he said.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.